Central America: A Safe Haven from the Trade War
As 2019 rolls on, the US-China trade war continues to escalate. On June 1st, it ratcheted up once more, with the US levying more tariffs on $200 billion of Chinese imports and Beijing responding with a tariff hike on $60 billion worth of US goods. This has negatively impacted both Chinese and American stock markets, while the World Economic Forum predicts an economic decline in nearly all global economies as a result.
Although the big picture sounds grim, there is a silver lining, at least for American firms. American firms looking to escape the tempest have a safe haven: Central America. In fact, shifting productive capacities from China to Central America could bring substantial long-term benefits to American industries.
The first and most obvious benefit of shifting from China to Central America is an escape from arbitrarily applied tariffs in a trade war. Looking at the regional geopolitical landscape, no Central American nation represents a “threat” to the United States large enough to warrant a trade war in the same way China does. The United States is very closely aligned with many Central American countries, drastically reducing the likelihood of a change in trade policy toward these countries. Even President Trump is hesitant to instigate trade wars with allies.
The glaring exception to this safety from tariffs is, of course, Mexico. President Trump has recently announced large tariff hikes on Mexico until “the illegal immigration problem is remedied.” However, it seems clear that this is a unique circumstance of a short-term issue, not a long-standing geopolitical competition as in the case of China and the United States. The Mexico tariffs, in other words, are less like a trade war and more like a temporary spat between allies.
Perhaps more importantly, House Republicans are considering directly rebuking Trump and blocking these new tariffs on Mexico. While it remains to be seen if this will actually occur, the point remains: lawmakers are going out of their way, at great political risk, to potentially curtail new tariffs on a Central American country, while they have cheered and championed the ongoing trade war with China. This speaks to the relative stability of the Central American region in comparison to the political dynamics between China and the United States.
The close ties between Central America and the United States have another benefit American firms won’t find in China: free trade agreements (FTAs). A quick perusal of the list of official American free trade agreements is illustrative—nearly every country in Central America is a party to a free trade agreement of some sort with the United States. These FTAs lower barriers to trade of all kinds, making it less costly and more efficient for American firms to produce goods in Central America for importation into the United States. The same cannot be said of China.
Central America’s advantages as a production location for American firms extend beyond just low tariffs and free trade. Simply put, Central America is far closer to the United States than China. As an example, consider manufacturing in Shanghai against manufacturing Honduras. It may take up to a month or more for products manufactured in Shanghai to make their way to the United States, while it would only take 2-3 days for products manufactured in Honduras to arrive. This creates a striking advantage for American companies who would choose to shift production from China to the United States, drastically reducing shipping costs while simultaneously increasing supply chain efficiency.
To summarize: although the US-China trade war is a net negative for the world economy, American firms have a safe haven in Central America. Shifting production from China to Central America would not only save American firms from the deleterious effects of tariffs but also reduce the barriers to trade as well as logistical costs, all at a similar cost of labor.